Asia And OEM Wins Will Fuel Digital Platform Expansion

Key Takeaways

• Strong sales trends in Asia and positive momentum in key verticals suggest potential for revenue growth and stability.
  
• ECS business growth and digital platform expansion position Arrow for improved revenue, margins, and long-term earnings.
  
• Exposure to trade uncertainties, reliance on cyclical trends, and elevated inventories pose risks to Arrow Electronics' revenue growth, margins, and earnings stability.

Catalysts

Provides products, services, and solutions to industrial and commercial users of electronic components and enterprise computing solutions in the Americas, Europe, the Middle East, Africa, and the Asia Pacific.

• Arrow Electronics anticipates stronger sales trends in Asia and across the larger OEM customer base, suggesting a cyclical improvement that could drive revenue growth in the upcoming quarters.
  
• The company is seeing positive momentum in key verticals like industrial, transportation, and aerospace, alongside improving book-to-bill ratios and backlog growth, which indicates potential for increased earnings and revenue stability.
  
• With the ECS business delivering consistent year-over-year growth in billings, gross profit, and operating income, fueled by cloud and infrastructure software advancements, Arrow is positioned for further revenue and margin enhancement.
  
• Arrow's strategic focus on growth opportunities in the IP&E market and specialization of their go-to-market efforts may continue to contribute to margin growth and increased revenues.
  
• The ongoing expansion of Arrow's digital platform, ArrowSphere, alongside supplier and customer base wins, supports recurring revenue growth, which could positively impact net margins and long-term earnings.

Arrow Electronics Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Arrow Electronics's revenue will grow by 6.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.4% today to 2.8% in 3 years time.
• Analysts expect earnings to reach $948.2 million (and earnings per share of $16.71) by about May 2028, up from $388.2 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 7.6x on those 2028 earnings, down from 15.4x today. This future PE is lower than the current PE for the US Electronic industry at 20.0x.
• Analysts expect the number of shares outstanding to decline by 2.55% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.35%, as per the Simply Wall St company report.

Arrow Electronics Future Earnings Per Share Growth

Risks

• The company's exposure to rapidly evolving trade policies and tariffs introduces significant uncertainty and complexity that could impact revenue growth, particularly if mitigation strategies like intelligent routing and cost pass-throughs are not fully effective.
  
• There is a risk of over-reliance on cyclical market trends with the assumption that current positive indicators such as improving book-to-bill ratios and backlog growth will sustain, which may not materialize and could affect future earnings.
  
• The inventory levels, although reduced, remain elevated, and any miscalculations in demand forecasting might lead to excess inventory, affecting the company's net margins and cash flow.
  
• A reliance on growth in the Enterprise Computing Solutions segment, marked by significant year-over-year billings growth, could be challenged if demand softens in key areas such as cloud and infrastructure software, which could impact projected revenue and operating income.
  
• Potential currency fluctuations, particularly with a weakening U.S. dollar against the euro, represent a risk that may positively or negatively affect reported sales and lead to unpredictable changes in earnings.

Valuation

• The analysts have a consensus price target of $118.26 for Arrow Electronics based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $135.3, and the most bearish reporting a price target of just $98.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $33.4 billion, earnings will come to $948.2 million, and it would be trading on a PE ratio of 7.6x, assuming you use a discount rate of 8.4%.
  
• Given the current share price of $115.09, the analyst price target of $118.26 is 2.7% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.